Market Insights – October 29, 2018

October 29, 2018 Chatham Financial

GDP Looks Strong

View this week's rates.

Prior Week Summary

Equity market volatility continued to drive activity in the fixed income markets last week, bringing the 10-year Treasury note back below 3.10%. The economic data point that garnered the most market attention was the 3.5% print for third-quarter GDP, which easily beat the consensus expectation for a gain of 3.3%. The report detailed that consumer spending, which accounts for roughly 70% of the economy, unexpectedly rose 4%, the largest gain since 2014.

On the other hand, however, non-residential business investment was a drag on growth, increasing at a 0.8% annualized rate in the third quarter. Government spending was reported to rise by the most in two years, somewhat offsetting issues relating to global trade. It remains to be seen how the recent tightening of financial conditions from the impacts of changes to monetary policy and equity market volatility will ultimately flow through to the real economy. As of this writing, the projected hike in December seems to be on track, although longer dated projections have become less clear.

In other market news, the FASB issued ASU 2018-16, which officially adds SOFR as a benchmark from the accounting perspective. This means that institutions can enter into SOFR swaps to hedge the benchmark risk of this index, assuming the institution has early adopted ASU 2017-12. Liquidity in exchange-traded futures continues to develop, and debt issuances referencing SOFR has only continued to grow.

The Look Forward

The data calendar is active this week, with the October payrolls report taking center stage on Friday. Also expected are updates on personal income and spending, and the ISM manufacturing index.

 

Rates Snapshot

Sources: Bloomberg Finance L.P., (Treasuries) Chatham Financial (Swap Curves), FHLB Boston, Chicago, Dallas, Des Moines for FHLB Advance Rates. Wells Fargo Brokered CD Indications.

 

Market Implied Policy Path (Overnight Indexed Swap Rates)

Source: Chatham Financial

 

Fixed Income Snapshot

Source: Bloomberg Finance L.P.

 

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit http://www.chathamfinancial.com/legal-notices/.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions.

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Market Insights – October 22, 2018
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